Thought leadership  

18/07/2017

Rethinking family governance

family-governance_Intranet-M.jpgThe wealth and structure of your family or your family business will change in line with economic, technological and sociological developments, and with new generations taking over the reins. These changes may not always have positive repercussions on your wealth, and could even diminish it. Have you considered measures to address this, such as family governance? We offer our clients assistance in this area via the modular Lombard Odier Family Programme. The following is an interview with our in-house experts on the subject.
 

Why should today's wealthy families or family businesses consider family governance?
Family governance became increasingly important in the 20th century, partly due to social and technological changes. These days in western society, the right of succession to the firstborn child is not truly applied, women are independent, and we are witnessing a general trend towards individualisation. The new generation is often free-spirited, more independent, and not slow to question their elders. Our working environment has also evolved: the internet, globalisation and technological advances have intensified and accelerated competition. The world of finance is more complex than ever before. Meanwhile, the world of work has grown considerably more professional, with greater demand for training, and the employment market is also in the grip of increasing competition. For all these reasons, a wealthy family or a family business needs efficient family governance to support it, so that it can grow and create a lasting future.

What does family governance mean?
Family governance – a steering, control and communication mechanism – establishes a framework for participation and decision-taking within a family. It guarantees transparency and stability, promotes family unity, and preserves the family heritage over the long term. It is an amalgam of rules, particularly those regarding succession; family members working in the business or managing its wealth; communication within and outside the family circle; and, specifically, communication between the family business or family office, the investment committee and the family itself. Good family governance provides a family with a structured framework and a clear organisation, through bodies and instruments defined in advance.

Is there a basic family governance structure on which a family can rely?
Each family governance structure is unique and adapted to the needs of a given family. It is implemented using structural governing bodies, such as family councils or family meetings. It frequently takes the form of a tool called a family constitution, or sometimes a family pact or charter.

What purpose do the structural governing bodies serve?
There is no predefined terminology for the governing bodies that are used, but families generally have:

  • A family meeting, where all the family members meet up.
  • A family council, which is a decision-making committee chosen at the family meeting and limited to between three and five members.
  • Family committees, as required. Families can set up a large number of committees, but in practice there is often an investment committee responsible for wealth management, a philanthropic committee, a committee for the new generation (which is responsible for training the younger members and providing continual professional development for the other family members) and sometimes a staff development committee for members of the family working in the business.
  • Sometimes, a family agreement. This is a short document stating the family's values or history.

This type of information is specified and defined in the family constitution, which is the bedrock of family governance and recognised by all family members. This is a strategic and often highly emotionally charged document, which sets the rules for organisation, succession planning and conflict resolution. It is a real guide for managing the family's wealth and values.

How does a family identify relationship risks within a family business where different interests are involved?
Family businesses need to factor in three spheres, based on what we call the Three-Circle Model: the family, the owners and the business itself. Underpinning this model are a variety of priorities, diverse interests and different expectations, and these are the aspects which take priority when it comes to analysing the family's situation. Each sphere has its own motivations and needs, which can be categorised as follows:

  • For the family, these are a sense of belonging, interpersonal relationships and the expectations of each family member.
  • For the owners, the interests will be property, inheritance and return on capital.
  • For the business itself, the focus with be on returns, performance and profit.

In terms of the risks to be considered, a family member working in the family business might be more interested in investing in the business than in how generous the dividends are. Those not involved in the firm might have other priorities. For example, the wife of the chairman of the board of directors might want to see her son manage the family business, but the business owner and cousins may disagree if her son does not have the necessary qualifications.

The ownership circle includes the managing bodies of the business as prescribed by law, such as the members of the general meeting and the board of directors.

An innovation we have introduced at Lombard Odier is that we also use family governance for families without a business. So instead of legal governing bodies, the ownership circle comprises the investment committee for the other family assets. It also comprises the succession documents, such as the will, marriage contract, succession agreement, business continuity plan and emergency plan in case of the unexpected death of family members working in the business. Finally, it includes the strategic plan, which forms part of current commercial practice.

The Three-Circle Model can also apply to families with shared wealth. Conflicts between heirs can potentially know no bounds, but the three most common sources of dissent are:

  • Conflicts over real estate or how to share it, which often lead to a forced sale of the asset.
  • Children who don't know how to manage the wealth.
  • Art collections which are of no interest to the new generation and have to be sold or split up.

In order to prevent conflicts and stop them escalating, it is important to gain a thorough understanding of the mechanisms behind the motivations and positions of all parties involved in the three circles. This is because they can exert a marked influence – negative or positive – on the development of the business or wealth. In this way, families with structured governance are equipped to successfully negotiate the challenges they face in their daily lives and in the future.

Lombard Odier Family Programme

Lombard Odier works actively alongside family businesses, supporting exchanges with our peer companies, for example through the Family Business Network (French-speaking Swiss FBN and FBN International).

The Lombard Odier Family Programme is a unique and innovative approach to transferring financial assets, based on principles designed for handing on family businesses. Its objective is to support families with the organisation, protection and transfer of their assets. The programme is structured as ten modules divided into three sections that can be combined to suit your requirements.

Three customisable sections

  • Governance
    • Organisation of the family
    • Values and family constitution
    • Introduction to family governance
  • Succession
    • Exiting the family business
    • Dynastic transfer
    • First-generation transfer
  • Advisory services
    • Family wealth management
    •  Philanthropy
    • Safeguarding of assets
    • Family office

IMPORTANT INFORMATION – GENERAL MARKETING
This is a marketing communication issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This marketing communication is provided for information purposes only.
It does not constitute an offer or a recommendation to subscribe, to purchase, sell or hold any security or financial instrument. It contains the opinions of Lombard Odier, as at the date of issue. These opinions and the information herein contained do not take into account an individual’s specific circumstances, objectives, or needs. No representation is made that any investment or strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes a personal recommendation to any investor. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Lombard Odier does not provide tax advice. Therefore you must verify the above and all other information provided in the marketing communication or otherwise review it with your external tax advisors.
European Union Members: This marketing communication has been approved for issue by Lombard Odier (Europe) S.A., a credit institution authorised and regulated by the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg and by each of its branches operating in the following territories: Belgium: Lombard Odier (Europe) S.A. Luxembourg · Belgium branch, a credit institution regulated in Belgium by the Banque nationale de Belgique (BNB) and the Financial Services and Markets Authority (FSMA); France: Lombard Odier (Europe) S.A. · Succursale en France, a credit institution and regulated in France by the Autorité de contrôle prudentiel et de résolution (ACPR) and by the Autorité des marchés financiers (AMF) in respect of its investment services activities; Italy: Lombard Odier (Europe) S.A.  • Italian Branch, credit institution governed in Italy by the Italian stock market regulator (Commissione Nazionale per la Società e la Borsa , or CONSOB) and the Bank of Italy; Netherlands: Lombard Odier (Europe) S.A. · Netherlands Branch, a credit institution regulated in the Netherlands by De Nederlandsche Bank (DNB) and by Autoriteit Financiële Markten (AFM); Spain: Lombard Odier (Europe) S.A. · Sucursal en España, a credit institution regulated in Spain by the Banco de España and the Comisión Nacional del Mercado de Valores (CNMV); and United Kingdom: Lombard Odier (Europe) S.A. · UK Branch, a credit institution regulated in the UK by the Prudential Regulation Authority (PRA) and subject to limited regulation by the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority (“PRA”). Details of the extent of our authorisation and regulation by the PRA and regulation by the FCA are available from us on request. UK regulation for the protection of retail clients in the UK and the compensation available under the UK Financial Services Compensation Scheme does not apply in respect of any investment or services provided by an overseas person.
In addition, this marketing communication has also been approved for issue by the following entities domiciled within the European Union: Gibraltar: Lombard Odier & Cie (Gibraltar) Limited, a firm which is regulated and authorised by the Financial Services Commission, Gibraltar (FSC) to conduct banking and investment services business; Spain: Lombard Odier Gestión (España) SGIIC, S.A., an investment management Company authorised and regulated by the CNMV. Switzerland: This marketing communication has been approved for issue by Bank Lombard Odier & Co Ltd, a bank and securities dealer authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA). United States: Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term “United States Person” shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.This marketing communication may not be reproduced (in whole or in part), transmitted, modified, or used for any public or commercial purpose without the prior written permission of Lombard Odier. © 2016 Bank Lombard Odier & Co Ltd – all rights reserved.

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